Bullard says Fed may need to boost QE if inflation slows further

Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to increase monthly asset purchases above the current $85 billion pace if inflation slows further below its 2% goal.

The Federal Open Market Committee “will face a decision if inflation continues to decline,” Bullard said today in a telephone interview from Washington. “Then the committee will have to make a decision about how to provide more accommodation.”

Bullard, 52, dissented from the FOMC’s June 19 decision to maintain the pace of asset purchases, saying the panel should “signal more strongly its willingness to defend its inflation goal.” In a statement earlier today, he said the Fed “inappropriately timed” a plan to start trimming bond purchases later this year, saying it should have waited for signs the economy is gaining strength and inflation is picking up.

The FOMC should have highlighted low inflation in its statement and indicated that “we can be more accommodative than we otherwise would have been,” he said in the interview.

Chairman Ben S. Bernanke, at a June 19 press conference following the statement, said the Fed may start “to moderate the monthly pace of purchases later this year” and end the program around mid-2014 if the economy performs as forecast. The bond buying will be cut by $20 billion at the Sept. 17-18 policy meeting, according to 44% of economists, a plurality, in a Bloomberg News survey released yesterday.

Prices as measured by the personal consumption expenditures index, a gage watched by the Fed, rose 0.7% for the year ending April. Excluding food and energy, the index rose 1.1%, matching the lowest in the 53 years of record-keeping.

While Bernanke called the decline in inflation “transitory,” Bullard said policy makers’ forecasts released this week show inflation won’t return to target until 2015 or later.

Food Costs

Commodities prices, which influence the cost of food and energy, have moved lower on reduced worldwide demand, Bullard said.

“The committee’s forecasts make it look like it is not” transitory, he said. “Europe is in recession -- one of the biggest economies in the world. China has been slower than expected.” Identifying what will cause prices to move higher as the FOMC expects is a “great question,” he said.

Rising U.S. Treasury yields partly reflect signs of stronger growth, as well as investors’ expectations of a sooner- than-expected pulling-back of bond buying, Bullard said. Rising inflation-adjusted interest rates represent a tightening of financial conditions that could slow economic growth, he said.

“I do think it is a risk,” Bullard said.

Too Focused

Bullard said the FOMC is too focused on unemployment, which is largely affected by elements outside of its control and has fallen faster than the Fed expected.

The St. Louis Fed president lowered his forecasts for this year’s pace of economic growth to 2.8% from 3%. He predicted the jobless rate would fall to 7.1% at the end of the year from 7.6% in May.

“We should get back to focusing on what we can do in the medium term, which is keep inflation close to target, and put less weight on labor-market outcomes,” he said.

The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. It added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.